Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Diminishing Balance Method of Depreciation Explained with Examples

Updated 10 October 2026 · Fact-checked

Under the diminishing balance (written down value) method, you charge depreciation each year at a fixed percentage on the book value at the start of that year. Depreciation = opening book value × rate. The charge is highest in year one and falls every year. The book value never reaches zero.

Understand Diminishing Balance Method of Depreciation

Every fixed asset loses value as you use it. The diminishing balance method, also called the written down value (WDV) method or reducing balance method, says the loss is bigger in the early years and smaller later.

Here is how it works. You fix a rate, say 10%. In year one you apply it to the cost. In year two you apply it to the book value (cost less depreciation already charged). So the base shrinks every year, and so does the depreciation.

Why is this logical? A new machine is more efficient and gives more output in its early years. Repairs are low at first and rise as the asset ages. Under this method, depreciation falls while repairs rise, so the total charge to profit stays fairly even across the years.

The merits are: it matches higher early use, the total of depreciation plus repairs stays levelled, and it is accepted for tax purposes in India. The demerits are: the book value never becomes exactly zero, the calculation is harder than straight line, and it is hard to find the right rate for a given scrap value.

Journal entries: Depreciation is charged by debiting Depreciation A/c and crediting the Asset A/c (when no provision account is kept). At year end, Depreciation A/c is transferred to Profit and Loss A/c. The asset stays in the books at its reduced book value.

Key formulas to remember

Depreciation for a year: Depreciation = Opening book value × Rate % ÷ 100; Base is the book value at the start of the year, not original cost (except in year one).
Book value at year end: Closing book value = Opening book value − Depreciation; This becomes the base for next year's depreciation.
Book value after n years: Book value = Cost × (1 − r)ⁿ, where r is the rate as a decimal; Useful shortcut when there are no additions or sales and the full-year charge applies each year.
Part-year depreciation: Depreciation = Book value × Rate % × Months used ÷ 12; Use for assets bought or sold during the year, if the question asks for a time-based charge.
Profit or loss on sale: Profit or loss = Sale price − Book value on date of sale; Sale price above book value is a profit. Below is a loss.
Journal entry for depreciation: Depreciation A/c Dr. to Asset A/c; Then: Profit and Loss A/c Dr. to Depreciation A/c.

How to solve Diminishing Balance Method of Depreciation questions

Use this order for any WDV question. Keep one running column for book value.

1Read the cost, date of purchase, rate and the year end. Note any addition, sale or change in rate.
2Work out the first year depreciation on cost. Adjust for months if the asset was bought part way through the year and the question says to charge for the period of use.
3Subtract it from cost to get the closing book value of year one.
4For each next year, apply the rate to that year's opening book value only.
5For an asset sold, charge depreciation up to the date of sale, then find the book value on that date.
6Compare sale price with book value. If sale price is higher, it is a profit on sale. If lower, it is a loss.
7Check the final figure: the asset must still show a positive book value, and each year's depreciation must be lower than the one before.

Quickest way: Multiply by the remaining fraction

When to use it: Use when a whole-year charge applies each year and you need the book value or depreciation after two or three years, as is common in MCQs.

Convert the rate to a remaining fraction. At 10%, you keep 90% each year, so multiply by 0.9.
Book value after one year = cost × 0.9. After two years = cost × 0.9 × 0.9, and so on.
Depreciation for a given year = book value at its start × rate. Or the difference between two book values.
For the profit or loss on sale, find the book value first, then compare with the price.
Check the options: depreciation values must fall each year, and a wrong option often shows the same figure each year, which is the straight line answer.

Common mistakes in Diminishing Balance Method of Depreciation

Charging the rate on original cost every year
It is the habit from the straight line method.
Fix: From year two onwards, always use the opening book value as the base.
Taking book value as zero at the end of life
Students assume every method wipes the asset off.
Fix: Under WDV the book value keeps falling but never reaches zero. Only an asset sale or write-off removes it.
Ignoring the months in the first year
The question gives a purchase date mid-year and students skip over it.
Fix: Check the date. If the asset is bought part-way, multiply by months used ÷ 12 when the question asks for time-based depreciation.
Computing profit or loss on sale against original cost
Students forget that depreciation has already reduced the asset's value.
Fix: Compare the sale price with the book value on the date of sale.
Mixing up a profit and a loss on sale
The sign is reversed under pressure.
Fix: Remember: price above book value is a profit, price below book value is a loss.
Using the wrong base after an addition
New assets bought during the year are added to the old balance incorrectly.
Fix: Work on each asset separately, or add the new asset only for its months of use.

Worked examples

Example 1

A machine costing ₹2,00,000 is bought on 1 April 2025. Depreciation is charged at 10% per annum on the diminishing balance method. Find the depreciation for the first three years and the book value at the end of year three. Accounts close on 31 March.

Show the solution

Year 1 depreciation = 2,00,000 × 10% = ₹20,000. Book value = 2,00,000 − 20,000 = ₹1,80,000.
Year 2 depreciation = 1,80,000 × 10% = ₹18,000. Book value = 1,80,000 − 18,000 = ₹1,62,000.
Year 3 depreciation = 1,62,000 × 10% = ₹16,200. Book value = 1,62,000 − 16,200 = ₹1,45,800.
Check with the shortcut: 2,00,000 × 0.9 × 0.9 × 0.9 = 2,00,000 × 0.729 = ₹1,45,800.

Answer: Depreciation is ₹20,000, ₹18,000 and ₹16,200. The book value at the end of year three is ₹1,45,800.

Example 2

A machine bought on 1 April 2024 for ₹1,00,000 is depreciated at 20% p.a. on the diminishing balance method. On 31 March 2026 (after charging depreciation for that year) it is sold for ₹70,000. Find the profit or loss on sale.

Show the solution

Year 1 (to 31 March 2025) depreciation = 1,00,000 × 20% = ₹20,000. Book value = ₹80,000.
Year 2 (to 31 March 2026) depreciation = 80,000 × 20% = ₹16,000. Book value = ₹64,000.
Sale price = ₹70,000. Book value on sale = ₹64,000.
Sale price is higher than book value, so there is a profit: 70,000 − 64,000 = ₹6,000.
Entry for the sale: Bank A/c Dr. ₹70,000 to Machinery A/c ₹64,000 and to Profit on Sale of Machinery A/c ₹6,000.

Answer: Profit on sale of the machine is ₹6,000.

Exam tips

Questions are objective, so write the book value in a column and tick off each year. It takes seconds and avoids slips.
Look at the options. If an option has the same depreciation every year, it is the straight line answer and is wrong for this method.
Always check whether the question asks for depreciation of a particular year or the book value at the end. They are different numbers.
For sale questions, find the book value on the date of sale first. Then apply sale price minus book value to decide profit or loss.
Read whether depreciation is charged for the year of sale. The question wording decides this.

Practice questions from Depreciation (Straight Line and Diminishing Balance Methods)

Diminishing Balance Method of Depreciation: frequently asked questions

What is the formula for the diminishing balance method of depreciation?

Depreciation for a year = opening book value × rate %. The book value falls each year by the depreciation charged. After n full years the book value is cost × (1 − rate)ⁿ, with the rate as a decimal.

What is the difference between straight line and diminishing balance method?

Under straight line, the same amount is charged every year on original cost. Under diminishing balance, a fixed percentage is charged on the reducing book value, so the charge falls each year. Straight line can bring an asset to its scrap value, while the diminishing balance book value never reaches zero.

Is the written down value method the same as the diminishing balance method?

Yes. Written down value (WDV), reducing balance and diminishing balance all describe the same method. Depreciation is charged at a fixed percentage on the book value that remains at the start of each year.

How do you find profit or loss on sale of an asset under the WDV method?

First work out the book value on the date of sale, after charging depreciation up to that date. Then compare it with the sale price. A higher sale price gives a profit on sale. A lower price gives a loss on sale.